UK Government Borrowing Surge Raises Prospect of Significant Tax Hikes

UK Chancellor Rachel Reeves faces mounting pressure to increase taxes in the forthcoming November budget after official figures revealed government borrowing soared to a five year high in August. Data from the Office for National Statistics showed a borrowing figure of £18 billion, the largest since August 2020. This total surpassed last year by £3.5 billion and far exceeded the Office for Budget Responsibility forecast of £12.5 billion for the month.

Government expenditure on benefits and the mounting cost of servicing public debt more than offset a rise in business payroll tax receipts, particularly after the spring’s £25 billion national insurance increase. Borrowing for the first five months of the fiscal year has now overshot OBR expectations by £11.4 billion, totalling £83.8 billion and heightening the likelihood of tens of billions in tax increases to be announced on 26 November.

The data also signalled a reaction on financial markets, with the yield on 30 year government bonds climbing to 5.54 per cent. The pound recorded its steepest two day drop since July, falling 0.5 per cent against the US dollar to $1.349 and losing 1.1 per cent over the same period.

Martin Beck, chief economist at WPI Strategy, commented that tax rises were now looking unavoidable. Paul Dales of Capital Economics highlighted the worsening trajectory of the public finances, despite only modest economic weakness. He estimated the chancellor would need to raise around £28 billion in the budget, primarily via increased taxation. Revised borrowing costs, subdued growth and a likely downgrade to productivity estimates could leave the chancellor with a potential £40 billion gap to close to remain within existing fiscal rules.

Under these rules, daily government spending must be entirely funded by tax revenues within five years. The present budget deficit stands £15.4 billion above the OBR’s forecast for the fiscal year to date. Grant Fitzner of the ONS noted that while tax and national insurance receipts had grown, these gains were outstripped by increases in public spending and debt interest. Inflation contributed to debt interest rising to £8.4 billion in August compared to £6.6 billion a year ago, as a significant portion of the UK’s debt is linked to the retail price index. The debt to GDP ratio reached 96.4 per cent in August, marking one of the highest levels since the 1960s.

James Murray, chief secretary to the Treasury, emphasised that fiscal responsibility and economic stability remained key goals for the government, as it aims to reduce borrowing and prioritise spending. Options under review are said to include property tax reforms, inheritance tax modifications and an extension of personal tax band freezes. Economists warn that increases in business taxes could pass costs to consumers, risking higher inflation and dampening growth. With little margin for error in the government’s spending plans, the consensus among analysts is that tax rises are all but certain if current fiscal rules are to be observed